In Defence of Pound-Cost Averaging

Although lump-sum investors may amass more over time, PCA might be more realistic from a logistical and psychological standpoint

Christine Benz 13 March, 2013 | 2:00PM
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Pound-cost-averaging—the notion of moving money into securities slowly over time rather than all at once—is close to dogma in financial-planning circles.

But when you look closely at the data, pound-cost averaging doesn't compare favourably with the strategy of investing a lump sum and letting it ride. The simple reason, as discussed in a Vanguard research paper and by my colleague Adam Zoll in his article ‘Is Pound-Cost Averaging Overrated?’, is that stocks generally trend upwards over time. Given that, you're generally better off investing the largest amount you can as soon as you can rather than dribbling the money into the market slowly during a period of months and years.

Yet as well-grounded as that research is, I'd argue that pound-cost averaging is still a sound strategy for most investors, mainly because of the following logistical and behavioural factors that accompany the two approaches.

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About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.